Monthly Archives: May 2012

The eurozone crisis narrative is based on the idea of good creditors and bad debtors. The idea is simple. It is also dangerously wrong. Spanish yields are high, apparently, because Spain finds itself in a poor fiscal and banking position whereas German yields are remarkably low because the Germans have delivered the right reforms. It follows, therefore, that other countries in the eurozone should become more Germanic. Read more

Robert Rubin believes economic conditions after November’s US presidential election will be unusually favourable for a deal that would get federal finances on a sustainable path. I think Mr Rubin is engaging in wishful thinking. Rather than being a propitious time for cutting a deal on taxes and spending, it is almost a certainty the opposite will be the case. Read more

What is Russia’s place in today’s world? Has its government built new bridges to the West? Hardly. After the Soviet Union collapsed, US and European leaders extended a hand toward Moscow. The G7 group of industrialised democracies became the G7+1. Nato, the West’s military alliance, created a Nato-Russia joint council. Russia inherited the Soviet seat in the UN Security Council.

How has all that worked out? When many of Russia’s neighbours moved to build new ties to the West, senior Russian leaders called it an American plot to encircle their country. When US leaders announced plans for a missile defence system in eastern Europe to counter threats from Iran, Russian officials warned that they were really designed to paralyse Russia’s defences in advance of a Western invasion. Read more

Whichever way you look at this troubling situation, last week’s intensification of deposit flight in Greece is much more than just a new wrinkle in what has become a protracted European crisis. If the phenomenon spreads, and it will in the absence of a credible region-wide policy response, control of Greece’s destiny within the eurozone would slip even further away from politicians and policymakers and more directly into the hands of a population that is in a rejectionist mood. Already this rejection is not that far from tipping Greece into a classic funding panic and the eurozone into real turmoil. Read more

Chastened by the explosive growth of credit-financed expenditures from the past stimulus program, China’s system now has to rely on the recently announced fiscal efforts to accelerate expenditures on infrastructure projects including roads, rail and power plants. While more transparent and less prone to waste, the fiscal channel is more bureaucratic with its expansionary impact less readily felt compared with the banking channel. Thus there continues to be a risk that Beijing’s fine-tuning of macro policies will fail to keep growth on the desired trajectory. Read more

The relationship between Greece and the rest of the eurozone is increasingly reminiscent of the cold war’s balance of terror. Greece is not the Soviet Union, and this is a financial rather than a nuclear crisis, but the mechanics are strikingly similar. Read more

The bank panic is Greece is now accelerating, and could easily push Greece out of the Eurozone unless decisive actions are taken to prevent a massive run on the Greek banks. If such a run occurs, and drives Greece to leave the euro, Greece’s exit would most likely create an even greater calamity, as Portugal, Spain and perhaps Italy, suffer rapid withdrawals of bank deposits as well. The Eurozone’s unwillingness to keep Greece in the union would create a powerful one-way bet against the survival of the currency union in several other countries as well. Read more

When she was in India this month, Hillary Clinton proposed a new dialogue between China, India and America (CIA). Some in Beijing are likely to reject this suggestion instinctively. Yes, it is possible that two of the world’s largest democracies may gang up against China. However, before rejecting this idea, they should think twice. Indeed, Hillary may have presented a wonderful geopolitical opportunity for all three countries. It is not a given that America and India will see eye to eye against China on the main global challenges. It is equally likely that India and China, or even America and China, may see eye to eye on some issues. Read more

Political observers are curious about why John Boehner would throw down the debt limit gauntlet now, especially since last year’s showdown is often credited for disturbing investor confidence. Read more

We need to begin thinking concretely about a political path towards stabilising the country and what a negotiated settlement with the Taliban might look like once the bulk of US troops have pulled out. Read more

Anyone who believes that US decline is inevitable ignores history. The US will almost certainly not face market pressure this year, or for several years to come. But there’s a catch: the very absence of market pressure makes it much harder for US policymakers to reach difficult compromises. This safe-haven curse imperils US efforts to foster robust economic growth and fiscal sustainability. Read more

Given conditions on the ground, the current 17-member eurozone needs to evolve into a smaller and less imperfect union if it is to avoid the growing risk of total fragmentation – namely a closer economic and political union among the big four (France, Germany, Italy and Spain) along with other members with similar initial conditions. Read more

Public anger over high levels of executive pay has provoked new government proposals in Britain for binding shareholder votes on remuneration committee reports. This will mark a revolution in corporate governance as shareholders would vote both on the past year’s awards and on the coming year’s plans for salary increases, bonuses and long-term share awards. Boards will find it difficult to deal with such intervention in complex pay structures. A ‘no’ vote is a blunt instrument which will not provide a clear steer on where to go next. Read more

In 1931, Austria was attempting to deliver the kind of austerity now being witnessed in parts of southern Europe. Under the Gold Standard, the only option to regain competitiveness was to force domestic prices and wages lower. In the process, businesses failed, non-performing loans rose and the banking system began to look incredibly vulnerable. The crisis culminated in the failure of Creditanstalt, a major Viennese bank – the 1931 equivalent of Lehman Brothers. What had up until then been only a Great Recession turned into the Great Depression. A handful of years later, Hitler was welcomed by cheering crowds in Vienna. Read more

No one can pretend to know whether Spain is illiquid or insolvent without gauging the size of the black hole that is the country’s banking sector. The Spanish government is finally starting to do this: Bankia and other banks are reportedly set to receive a capital injection from Madrid. With the Spanish economy contracting sharply and with unemployment soaring, it was inevitable that the government had to bail out the banks. But this only deals with one piece of the puzzle. Without growth, the Spanish sovereign will need a bailout as well. Read more

Neither the pomp and ceremony of the Queen’s Speech nor its accompanying bills can hide the fact the UK requires urgent action to restart growth.

So too does Europe as a whole. A European recovery would help the UK greatly. But Europe will take time to agree a strategy: the UK can and must get on with it. There is a clear way forward – kick-start investment now through strong, clear and credible measures that mobilise private savings. Read more

Ian Bremmer, president of Eurasia Group, talks to Alec Russell, the FT’s comment and analysis editor, on why US investors are less perturbed about the eurozone crisis than last year, and on the perils of an increasingly isolationist America

On the face of it, this is good news for the little man. The most closely watched initial public offering in years – that of social media group Facebook – will reportedly include a dollop of shares earmarked for small investors.

Here is my advice: do not buy any. For every Google or Facebook, several more lie in the dustbin of Wall Street history. One-time go-go stocks such as Pets.com, Webvan and eToys are all just painful memories for those who took the plunge.

Poor Ben! He has gone further than any other central banker in recent times to try to stimulate the economy through monetary policy. He has cut interest rates to the bone. He has adopted innovative new methods of monetary easing such as quantitative easing. Again and again he has repeated that while inflation is contained, his main concern is the high level of unemployment in the United States. And yet he is chastised by progressive economists for not doing enough. Read more

French and Greek voters have rejected Europe’s current macroeconomic framework. The headlines cry that voters demand growth rather than austerity. Yet growth is not a policy but an outcome. A vote rejecting the incumbents does not define the policy alternatives. Read more

To many, my analysis will seem overly downbeat. It is not. It is a reflection of a multi-faceted unemployment crisis that politicians, both in America and Europe, are failing to comprehend, unite around, and respond to. Read more

Here’s how to start an argument in Britain. Suggest that far from being inherently flawed, the euro is fixable and could succeed in the long run. Suggest Britain should even consider joining it at some point. This last idea is a proposition with which the majority of British people disagree, strongly. I know this because the think tank Policy Network has today published new polling that tells you that eight in ten British people believe Britain should never join the euro, in any circumstances, even if it costs Britain influence in Europe. I am going respectfully to disagree. Read more

The eurozone economy is projected to be in recession this year and to barely stabilise in 2013. This should provide grounds for a depreciation of the Euro against other major currencies.

Yet such a depreciation is not happening. The reason is that several foreign official institutions, notably the central banks of emerging markets such as China, are continuing to intervene in the foreign exchange market to buy Euro-denominated assets at a pace which more than compensates the sales of private market participants. Read more

Mr Wen’s predicament is that turning to the hard option would not necessarily make life easier for the CPC. To the contrary, the process would become more bureaucratic and sacrifice some timeliness. But the change would encourage more representative, accountable, and transparent decision making, curb opportunities for corruption, and reduce the likelihood of waste—all issues that are now being debated more seriously in the wake of the Bo Xilai scandal. Read more

Nowhere will this lack of global leadership allow for more near-term turmoil than in the Middle East. In recent years, for good and for ill, self-interested outsiders, mainly Americans and Europeans, have imposed a stable status quo across the Arab world. They have promoted and protected autocrats, but they have also helped maintain a sometimes tenuous balance of power. Read more